Calculating The Fair Value Of Sensient Technologies Corporation (NYSE:SXT)

In This Article:

Key Insights

  • Sensient Technologies' estimated fair value is US$64.70 based on 2 Stage Free Cash Flow to Equity

  • Sensient Technologies' US$76.31 share price indicates it is trading at similar levels as its fair value estimate

In this article we are going to estimate the intrinsic value of Sensient Technologies Corporation (NYSE:SXT) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Sensient Technologies

The Method

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$163.9m

US$140.1m

US$143.5m

US$137.8m

US$135.0m

US$134.1m

US$134.6m

US$136.0m

US$138.0m

US$140.6m

Growth Rate Estimate Source

Analyst x1

Analyst x1

Analyst x1

Est @ -4.00%

Est @ -2.02%

Est @ -0.63%

Est @ 0.35%

Est @ 1.03%

Est @ 1.51%

Est @ 1.84%

Present Value ($, Millions) Discounted @ 6.9%

US$153

US$123

US$118

US$106

US$96.8

US$90.0

US$84.5

US$79.9

US$75.9

US$72.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$998m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.6%. We discount the terminal cash flows to today's value at a cost of equity of 6.9%.

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